Tariff War: What It Means, Effect, and History

What Is a Tariff War?

A tariff war is an economic conflict in which each country levies an additional tax on the other's exports. Tariff wars generally start when the leadership of one country is unhappy with a trade partner's trading behavior or for geopolitical reasons.

Understanding Tariff Wars

In a tariff war, one country raises tax rates on another's exports. The recipient of the first country's taxation then raises taxes on its exports in retaliation. The increased tax rate is designed to hurt other countries economically, as tariffs discourage the citizens of the importing country from buying the exporting country's products by raising the total cost of those products.

One country may incite a tariff war because it is unhappy with one of its trading partners’ political decisions. By putting enough economic pressure on the country, it hopes to force a change in the opposing government’s behavior. This type of tariff war is also known as a customs war.

The Effect of Tariff Wars

Tariff wars often have unintended consequences and tend to negatively affect businesses and consumers on each side. For example, China is one of the world's largest (if not the largest) soybean importers, and the U.S. is one of the largest soybean exporters. In response to the U.S. tariffs, China placed a 25% tariff on soybeans from the U.S.

Brazil, another large soybean exporter, also exports to China. There was no tariff on Brazil's soybean exports, so it naturally experienced an increase in soybean exports to China. This drop in demand for U.S. soybeans caused farmers to end up with more than 3.7 billion bushels of soybeans in storage in 2018. Soybean sale losses were so high that the U.S. government compensated soybean—and other commodity—farmers to the tune of billions of dollars.

The Chinese, in turn, had to pay more for soybeans because demand remained the same. Brazil's soybean prices increased by $0.97 per bushel. Chinese soybean imports from Brazil increased to compensate for the supply change; however, because Brazilian soybean prices increased, China ended up paying about the same for soybeans as it would have if it imported from the U.S. and paid the tariffs. The retaliatory tariff ended up hurting Chinese businesses and consumers anyway.

Other issues arise when tariff wars occur. Supply chains are affected, and real exports and GDP decline. Companies might be forced to hire fewer employees, and capital losses could be significant. In 2020, the Federal Reserve found that the trade war with China had cost U.S. firms $1.7 trillion in market capitalization.

History of Tariff Wars

The U.S. didn't impose high tariffs on trading partners until the 1920s and early 1930s. Tariffs in that era contributed to an overall decline in world trade of about 66% between 1929 and 1934. The Smoot-Hawley Tariff Act of 1930 is generally credited with seriously exacerbating the Great Depression, leading to the election of President Franklin D. Roosevelt, who, in 1934, signed the Reciprocal Trade Agreements Act that reduced tariff levels and liberalized trade with foreign governments.

Recent Trade Wars

Donald Trump was one of the few presidential candidates to speak about trade inequalities and tariffs in 2016. He vowed to take a tough line against international trading partners, especially China, to help American blue-collar workers displaced by what he described as unfair trade practices.

When he took office in 2017, his administration first targeted solar panels and washing machines from China. In March 2018, tariffs of 25% were added to imported steel and 10% on imported aluminum. In early 2025, Trump imposed a 10% tariff on all Chinese imports.

Tariffs on China

Several countries were exempted, but Trump announced that the U.S. government would apply tariffs on $50 billion worth of Chinese imports in 2018. That led to back-and-forth tariff announcements as the Chinese government retaliated in early April 2018 with a 15% or 25% tariff on imports from the U.S. that included 94 different U.S. foods and agricultural tariff lines. In response, President Trump added $100 billion worth of Chinese products to the list.

Trump promised more to come on Oct. 1, 2019, though he delayed some of those new tariffs until Dec. 15, 2019, to avoid hurting the Christmas shopping season. As a result of the tariff war, the manufacturing sector of the American economy saw factory output drop, tipping it into a recession.

In the trade agreement commonly referred to as the U.S-China Economic and Trade Agreement (Phase One), China agreed to increase its purchase of certain U.S. goods and services by $200 billion through December 2021. However, China only imported 58% of the promised goods and services.

Trump wasted little time during his second presidential term to impose new tariffs. An additional 10% tariff took effect on all Chinese goods on Feb. 4, 2025. China quickly announced retaliatory tariffs on select American imports, including 15% duties on coal and liquefied natural gas products and a 10% tariff on crude oil, agricultural machinery, and large-engine cars. Trump plans to implement a 25% tariff on goods from Mexico and Canada, but it's currently delayed following negotiations.

Trump-Era Tariffs Extended

In 2022, then President Joe Biden extended Trump-era tariffs on solar panels and cells. However, a few months later, he declared an emergency regarding electrical services and temporarily suspended tariffs on specific solar cells and modules from Cambodia, Thailand, Vietnam, and Malaysia.

The Bottom Line

Tariff wars, such as the recent U.S.-China trade conflict, are economic battles where countries impose taxes on each other’s exports. While they aim to address unfair trade practices or political disagreements, these wars often lead to higher consumer prices, supply chain disruptions, and long-term economic damage for both parties. Though some short-term benefits might occur, the overall impact on global trade, businesses, and consumers tends to be negative, as historical examples have shown.